Elite Chinese Politics and Political Economy

My name is Victor Shih, currently an assistant professor of political science at Northwestern University specializing in Chinese politics. This blog shares my musing and discussions on Chinese politics and political economy with interested readers. You can contact me at vshih AT northwestern.edu, and my website, where I post my recent research is: http://faculty.wcas.northwestern.edu/~vsh853/

Monday, October 26, 2009

Comparing Bo Xilai with Chairman Mao??

The People's Daily published the following curious comparison between Bo Xilai and Chairman Mao. Just as Mao was forced by circumstances in 1927 to fight guerilla warfare, Bo Xilai was likewise forced by circumstances to get rid of the mafia in Chongqing....Eh, I am speechless. This is either someone at RMRB trying very hard to pander to Bo, or even worse, Bo himself ordered the publication of this article in open defiance to the current succession arrangement. Actually, the historical parallels may not be so far fetched-- Mao was a dark horse and was at the bottom of the elite in 1927. However, after ruthless struggle against both internal enemies and the KMT, Mao had become the top leader of the CCP by 1937.

It now seems clear that Zhou Yongkang has backed Bo. More broadly speaking, it would seem that Bo - known to have wanted the Guangdong party secretary gig - is to some extent targeting Wang Yang, as he was previously in Chongqing, and was most certainly in cahoots with all of the business people and local officials now in jail. How does Wen benefit from all of this, or does he complete the love triangle somehow?

Dear all, my WSJ op ed from last Friday in case some of you missed it. This is not a criticism of the IMF for restructuring, but just a commentary on the irony of it all.

Property rights and contracts are still subordinate to the Party's interests.

By VICTOR SHIH

In an era when the most developed economies are running record fiscal deficits, it is reasonable to look for new global economic leadership. Gauging solely by officially reported deficits and cash reserves, China seems an ideal candidate. Indeed, a senior International Monetary Fund bureaucrat revealed Saturday in Beijing that China may soon become the second-largest shareholder in the organization after internal restructuring.

But leadership does not depend on cash reserves alone. To lay credible claim to a bigger global role, Beijing must show it understands the rules that make a modern economy work and how to play by them. The economic downturn has only shown how far behind Beijing is in this regard. China's market institutions clearly lag those in more advanced Asian and Western countries. Parts of the government continue to blatantly disregard property rights and contracts. Rules are conveniently bent to favor powerful state entities.

View Full ImageShihDavid KleinShihShih

The greatest victims of the government's disregard for property rights and contracts are domestic private entrepreneurs. Recent months saw the forced nationalization and mergers of hundreds of privately leased or owned coal mines. With the issuance of a few decrees from Beijing, domestic investors who plowed their own savings into mining lost billions. Similar examples abound in other sectors, as state agencies try to alleviate a growing overcapacity problem by forcing private firms to sell out to state-owned competitors at state-mandated prices. Because the legal system and state agencies all stand on the side of state firms, private firms have little recourse to oppose government takeovers.

Foreign investors, who used to enjoy some protection from state predatory behavior, have also fallen victim to this in the downturn. To lessen the losses of state-owned enterprises (SOEs) that entered into money-losing derivatives contracts with offshore counterparties, the State Asset Supervision and Administration Commission, the regulator for state firms, indicated to stunned bankers in Hong Kong in early September that these SOEs may not honor their contracts because the Commission never granted some SOEs the permission to enter into derivatives contracts. Not wanting to anger the government, foreign banks are now leaning toward arbitration, but a sour taste has been left in their mouths.

In a similar case, foreign investors in China's enormous distressed-asset market were surprised by a July decision by the Supreme People's Court that foreign investors who had legally purchased a nonperforming loan cannot obtain the collateral that the original guarantor pledged to a loan without the guarantor's permission and without the approval of the local foreign-exchange authorities. This decision makes it very difficult for foreign investors in distressed assets to collect on collateral that is legally bound to a given loan without surmounting numerous legal and bureaucratic hurdles.

This ruling shows China's lack of preparation even more clearly than the reneged derivatives deals. Foreign investors in distressed loans were invited by the government in the early 2000s to help digest more than 1.4 trillion yuan ($205 billion) in nonperforming loans. These investors have helped China rescue billions in distressed assets, rehabilitating many into profitable businesses. But when a well-connected state firm, Chongqing Yi De Industrial, appealed the Supreme People's Court to overturn an earlier decision in favor of the foreign creditor, the judges went against elements of its earlier rulings and ruled in favor of Yi De Industrial in July. The legal system's usual bias toward connected insiders once again seemed to have determined the outcome.

In all these examples, the Chinese government could have chosen to show the world it is willing to respect property rights, enforce contracts fairly and discipline firms that violate the rules regardless of their political connections. Instead rules were disregarded to maintain the facade of relative budgetary balance and SOE profitability, and connected insiders and large SOEs with political influence were once again told that they need not adhere to contracts. Private entrepreneurs and outsiders were reminded that the law means little without political backing.

Chinese decision makers need to realize that global economic leadership does not stem only from a large cash hoard. In the long run, a credible respect for property rights and unbiased contract enforcement will draw a larger share of global investors into the Chinese economic sphere. Until such a day arrives, China's economy will tend to attract connected rent seekers who profit from the government's willingness to bend the rules.

Mr. Shih is assistant professor of political science at Northwestern University and the author of "Factions and Finance in China: Elite Conflict and Inflation" (Cambridge University Press, 2008).

Thursday, October 15, 2009

Xi Jinping Sends Signals by Giving Merkel Books by Jiang

There are moments when my gut tells me that something is very, very wrong in China, and this is one of those moments. Apparently, during his visit to Germany, Vice President Xi Jinping held a meeting with Prime Minister Merkel where he gave Merkel two books authored by the FORMER party secretary general of the CCP Jiang Zemin. The caption of the People's Daily story on the meeting reads "Chinese Vice President Xi Jinping (L) presents two books written by former Chinese leader Jiang Zemin to German Chancellor Angela Merkel at the start of their meeting in the Chancellery in Berlin, capital of Germany, Oct. 12, 2009.(Xinhua/Lan Hongguang)" You can check out the whole story by going here.

So, what is one to make of this. This is clearly a strong signal of some kind. Willy Lam, as always, presents an incisive interpretation that Xi is showing his strong disapproval of Hu's delay of his entrance into the Central Military Commission (see below). The presentation of books by Jiang also signals to Jiang his loyalty, and is basically asking Jiang to ensure his entrance into the CMC. In conjunction with Jiang's prominent presence during the anniversary, Jiang seems to be making a strong come-back in the run-up to the 18th Party Congress. The reason why this move is making me queasy is that in order to maintain his authority before the 18th Party Congress, Hu will need to do something drastic to show that he still has real power and would not stand for such humiliating displays of disloyalty from Xi. I await with rather dreadful anticipation of what will come next.

Asian Sentinel

Cracks in China's Great Politburo Wall Print E-mail

Written by Willy Lam Tuesday, 13 October 2009ImageVice-President Xi Jinping drops strong hint at big rift with President Hu Jintao

Now we know what Vice-President Xi Jinping must have felt when he failed to make it to the Chinese Communist Party's Central Military Commission at a plenary session of the Central Committee last month. The supposed front-runner to succeed Party Chief and President Hu Jintao apparently blamed the supremo for not inducting him into the policy-setting military commission, which has been headed by Hu since 2004.

During his current trip to five European countries, Xi, 56, has departed from protocol and hardly given Hu a mention. According to long-standing diplomatic custom, a senior Chinese cadre on tour would first convey to his hosts the greetings of President Hu. Xi's failure to acknowledge and salute Hu's leadership was most obvious when he met with German Chancellor Angela Merkel in Berlin on Monday.

Before the official discussion began, Xi handed to Merkel the English editions of two books – on energy and on information technology – written by ex-president Jiang Zemin. According to the official Xinhua News Agency, Xi then "passed along Comrade Jiang Zemin's greetings and good wishes" to the German leader. Merkel reciprocated by asking Xi to send her greetings to Jiang. There was no reference to Hu throughout the two leaders' tete-a-tete.

This was the first time in less than two weeks that ex-president Jiang, 83, appears to have upstaged the 67-year-old Hu. During celebrations to mark the 60th birthday of the People's Republic of China on October 1, the official Chinese media gave Jiang pretty much the same prominence as Hu. For example, he appeared 20 times on CCTV's coverage of the all-important military parade. And Hu was caught a couple of times on TV assuming a humble posture next to the talkative and high-spirited Jiang. The next day, the People's Daily put two same-sized pictures of Hu and Jiang side by side on its front page.

As the highest-ranked Fifth-Generation politician in the supreme Politburo Standing Committee, Xi is slated to succeed Hu as party general secretary at the 18th CCP Congress in October 2012 – and as state president a few months later. Yet it is well-known among political circles in Beijing that Xi does not come from Hu's Communist Youth League faction. Instead, the son of former vice-premier Xi Zhongxun is the putative head of the powerful Gang of Princelings, a reference to the offspring of party elders. Moreover, it was partly due to support rendered by ex-president Jiang, himself a princeling, that Xi was virtually designated Hu's heir-apparent at the 17th Party Congress in 2007. Xi's failure to be inducted into the CMC last month, however, was a signal that he might not enjoy a cosy relationship with his boss.

Instead, Hu is believed to be pulling out all the stops to improve the political fortunes of Youth League stalwarts such as Politburo Standing Committee member and First Vice-Premier Li Keqiang, who at this stage is expected to take over the premiership from Wen Jiabao in early 2013.

Xi watchers are not surprised by his strange demeanor in Berlin. During his tour to Latin America early this year, the vice-president aroused controversy by using earthy language to attack a certain country – widely thought to be the US – for alleged interference in China's domestic affairs. While talking to diplomats and Chinese representatives in China's embassy in Mexico City, Xi intoned: "There are people who seem to have nothing to do after filling their stomachs. They like to point their fingers at China's internal affairs." The vice-president's remarks were not reported by the Chinese media.

In any event, Xi's apparent decision to openly side with Jiang – and his failure to appear deferential to Hu – is a good indication that factional rivalry and jockeying for position has begun some three years before the 18th Party Congress. At that all-important conclave, a new corps of party and state leadership will be picked as at least half of the current PSC and Politburo members are set to retire.

Keep posting on this topic. I really want to read your book and better understand your perspective on factions now. "One Party State" is always a myth, but the particulars of the divisions are fascinating.

Thursday, October 01, 2009

A Brazilian reporter asked me some questions about the 60th anniversary, here are my answers:

1- Whatâ€™s the meaning of this celebration in China that starts this Thursday in your opinion? Is it an internal celebration, or the main goal is to impress the world?

Both. Of course, the leaders want to show the world its unity and military might. However, a parade is also a way to monitor the effectiveness and loyalty of military and civilian units.

2- Why the Chinese people is not part of the celebration?

The participants in the parade and even the audience are carefully selected because the government doesn't want any disruption to the celebration. Any sign of protest would be highly embarrassing to the government and its leaders.

3- Generally, the recent history of China is divided in two phases, the socialism under Mao Zedong, and a much more pragmatic era since Deng Xiaoping. Do you think itâ€™s possible to estimate whatâ€™s going to be the next phase?

This is difficult to estimate. Some China scholars, including myself, believe there will be a "Latin Americanization" of Chinese politics in which special interests like real estate developers and large state owned enterprises will increasingly drive policy making. If true, this would lead to a period of economic stagnation without any fundamental reform.

4- Will the presence of the State still be so strong in the future of China, or it may be eased in the next years?

The presence of special interest groups will be strong, and they will use state power to drive out competition, both domestic and abroad.

5- What are the main challenges in Chinese future, in your opinion?

Overcoming the influence of special interest groups to enact much needed reform. Because China is such a world player, I think this is important for the world as well. Highly subsidized Chinese firms drive out competitors in the US and Europe, as well as other parts of the world.